Public Private Partnerships and Constitutional Law

Accountability in the United Kingdom and the United States of America

Nikiforos Meletiadis

• Publisher: Routledge
• Year: 2018
• ISBN:
  9780429821806
• Edition: 1
• Topic: Business
• Subtopic: Business Law
• Index: Business

Annually, the government commits significant expenditure to a type of public contracts which are known as Public-Private Partnerships (PPPs) or the Private Finance Initiative (PFI). These contracts bind the public purse for decades in sectors such as Health, Defence and Detention, and involve the assignment of a significant role to the private sector in the provision of public services. This book explores the controversial subject of the public accountability of these contracts, and the corresponding large sums of public money involved. It explains how public accountability works for PPPs and the PFI, and it argues that it should be provided as part of the Economic Constitution. Drawing comparative understandings from the UK and the USA constitutional legal traditions, the book investigates public accountability from the perspective of the Economic Constitution, focusing on three accountability criteria - legal, accounting and administrative. In doing so, it provides an analysis which informs both from the perspective of academic research and from that of legal and consulting practice.

1 Public-private partnerships in the United Kingdom

1. Introduction

Throughout the introductory chapter we highlighted the purpose of this book, which aims to examine the systems of accountability which have been developed for the use of public money in PPPs. As we have clarified, the perspective on which we will focus is that of the criteria of accountability. In this first chapter, we will be discussing the subject of the criteria of accountability and their impact on the broader accountability mechanisms for PPPs within the Economic Constitution of the UK.

The UK has a rich history in the use of PPPs. Starting in the early 1990s, the UK procured important infrastructure, such as hospitals, prisons, and schools, assigning their financing, building, management and operation to private bodies using PPP contracts. In terms of this process, a major criterion of public accountability, which arose from scrutiny of government’s use of PPPs, was that of Value for Money (VfM). The criterion of VfM is used to evaluate important aspects of PPPs, and the organs which are entrusted with scrutinising the government use this criterion in the public accountability process. Given the widespread use, and the predominance of the criterion of VfM as a means of public accountability, an important issue which arises is how well the use of the criterion serves the purposes of public accountability for PPPs in the UK Economic Constitution.

The first point from which we will begin our inquiry focuses on the integration of PPPs to the UK Economic Constitution. Specifically, we might ask why UK PPPs, and their criteria of accountability, are matters that need to be examined by the Economic Constitution. What’s special about them? Answering this question will be our purpose in the first section, where we will explore the nature and the scope of PPP transactions, and their integration into the UK Economic Constitution. We will note that the expansion of the PFI, which is the typical PPP in the UK, is promoted predominantly through executive initiatives and with limited use of legislation. From the context of the UK Economic Constitution, it is interesting to seek to evaluate the systems of accountability developed for PPPs, with the limited use of legislation. In other words, PPPs are used too much in the UK for the Economic Constitution to be indifferent when it comes to their accountability, especially given their non-statutory promotion.

The second point on which we need to focus explores the nature of public accountability which is promoted with respect to PPPs in the UK. The answer to this second question is far from straightforward and demands an elaborate discussion of the nature of VfM criterion and the functions of accountability which it is designed to serve. As we will argue, the criterion is mainly one of bureaucratic accountability and, further to that, it is a criterion exposed to a substantial degree of subjectivity. This makes it difficult to handle the issues of constitutional public accountability, especially the absence of statutory criteria. In turn, this gives rise to the exercise of normative functions on the part of organs who have no statutory authority in relation to PFIs.

A solution to these problems of public accountability caused by the use of the criterion of VfM could possibly stem from the recognition of an agreement between the PAC and HM Treasury (Treasury) in 1932 as a constitutional convention. This recognition involves the introduction of a positive rule relating to the government, thereby enabling it to use statutory authorisation in cases of major PFI investment involving the transfer of continuing government functions to the private sector. This, we will argue, could be poised to have a positive impact on relativising the weaknesses which are borne by the current system of public accountability for PFI based on VfM, and on the productive integration of the PFI transactions to the UK Economic Constitution.

2. The integration of PPPs to the Economic Constitution in the UK

We asserted in the introduction to this chapter that a valid point of departure for our enquiry into accountability for PPPs comes from the Economic Constitution. In this section, therefore, we will discuss the nature and scope of PPPs in the UK and their relationship with the Economic Constitution. The specific perspective of the Economic Constitution which we will be using is that which sees the Economic Constitution as a framework of Constitutional Law analysis which focuses upon ‘the key constitutional principles and institutional arrangements which may be relevant to the management of the economy’.¹

2.1. Nature and scope of PPPs in the UK

The first reason for which PPPs need to be the subject of an inquiry of Economic Constitutional Law draws from their nature and scope, and involves their expanded use and important integration in the provision of public services. PPPs in the UK have mainly been used under the umbrella of PFI.

The Treasury provides us with a good brief definition of PFI, which will serve as a useful starting point:

The Government introduced PFI in 1992 as a means of harnessing the private sector’s efficiency, management and commercial expertise and to bring greater discipline to the procurement of public infrastructure. Under this policy, the private sector was engaged to design, build, finance and operate infrastructure facilities through a long-term contractual arrangement. PFI was introduced to deliver high quality assets and services and better VfM for the public sector. It aimed to do this through the transfer of appropriate risks to the private sector, a clear focus on the whole of life costs of projects and an innovative approach to service delivery. The payment for PFI projects was structured to ensure that the public sector only paid for the services that were delivered.²

As was mentioned earlier, PFI is a species of PPPs.³ The generic term PPP covers a wide range of types of collaboration between the public and the private sectors⁴ such as privatisations and contracting-out. PFI differs from privatisations because, in PFI, the public sector retains a significant role in the operation of the project, and it differs from contracting-out because, in PFI, the private sector provides the capital asset as well as the services. The PFI differs from other PPPs in that, in addition to other services it might provide, the private sector also arranges the finance for the project.⁵ In a typical PFI project, in addition to its financing, the private sector is responsible for the design of facilities which are necessary to support the provision of the public service, the building of these facilities, and their operation. The public sector determines the output specifications of the project for the fulfilment of which the private sector is responsible. In terms of a PFI project, the public sector does not own the facilities involved, such as the hospital or school which is being built, but pays the PFI contractor a stream of committed revenue payments for the use of these facilities over a period of time specified in the contract. With the expiration of the contract, the ownership of the facility either passes to the public sector, or it remains with the private contractor, in accordance with the provisions of the agreement.

An illustration of a PFI project would be helpful at this point, and we can usefully return to one related to the construction of a hospital which is already familiar to us from the Introduction. In this hospital PFI contract, a private consortium of companies undertake to finance the relevant facility, and design, construct, and operate it, in order for it to meet the outputs provided by an NHS Trust. The Trust could specify the detail required for various outputs, such as the number of patients that the hospital should be able to accommodate, and the types of health-related incidents that it should be able to handle. The Trust would undertake, pursuant to this contract, to pay to the private consortium a specific amount, which is called the ‘unitary charge’ for the duration of the contract, which would typically be 30 years. Finance for the facility would originate from bank loans – in percentage terms, amounting to 90 per cent – and from equity for the remaining 10 per cent. The private sector would undertake the relevant borrowing, and it would use the unitary payments received by the government in order to cover the resulting financial responsibilities and make a profit.

PFIs are thus long term contractual arrangements, extending for over 20–30 years, and the fact that the private contractor is responsible for the designing, building, financing and operating of the facilities makes him the principal bearer of the risks that might arise during any of these phases.⁶ It should be noted, that this transfer of risk between the public and the private sector refers to a type of risk which is contractual, or economic, and it does not cover the risk over the non-provision of the public service to the citizens; the ultimate business risk of the provision of the public service always remains with the government.⁷ It is the government which retains ultimate responsibility towards its citizens for the provision of the public service, irrespective of the means – PFI or otherwise – which it selects to provide this service.

As per 31 March 2014, there were 728 PFI projects in the UK, out of which 671 were operational, with a capital value of £56.6 b. 8 The most active departments in terms of PFI activity are those of Health (with 123 projects, worth £12082.9 m), those of the Department of Education (with 168 projects, worth £7799.5 m), others of the Department for Transport (with 62 projects, worth £7878.8 m) and those of Defence (with 41 projects, worth £9042.8 m).

The last few years have witnessed some of the most significant PFI projects.⁹ For instance, the PFI contract for the investment in, and improvement of, 42 (out of 44) waste disposal sites in Greater Manchester was launched by the Department for Environment, Food and Rural Affairs (DEFRA) on April 2009 and is expected to be completed in March 2034. Another PFI project, the widening of three-lane sections of the M25, was launched by the Department for Transport in December 2008 and is a contract due to end in November 2038. Similarly, the Private Sector Resource Management of Estate is a PFI project designed to fully manage the buildings for the Health and Safety Executive and Health and Safety Laboratories. This was launched by the Department for Work and Pensions, with the contract starting in May 2005 and finishing 30 years later, in May 2035. The Department of Health has advanced three important PFI projects during the past decade. The first one, in June 2006, had the aim of delivering hospital facilities for University Hospital Birmingham NHS Foundation Trust, and it is expected to be completed in April 2046; the second one, in May 2009, involved the construction of a new and improved Saint Mary’s Hospital in Greater Manchester, and was expected to be completed in April 2047, but it has now been confirmed that the public authority is terminating the PFI; the third one began in March 2010, and involves the redevelopment of cardiac and cancer facilities at St Bartholemew’s and the London NHS Trust. Four other projects, organised by the Ministry of Defence over the past 15 years, have also ...